Prior to the Industrial Revolution, production was carried out in a small scale and the number of organizations operating in a single industry was less. The world economy was characterized by scarcity. But the industrial revolution changed the entire business landscape. Aided by mechanization, production began to be carried out in a large scale basis and many new firms were set up.
Large scale production and entry of new firms led to increased production levels. The situation of scarcity was converted into a situation of surplus. The entry of new firms led to increased competition. Many times the competition degenerated into unhealthy and wasteful competition.
Firms resorted to selling their products very cheaply just to overthrow their rivals. This behavior of firms led to reduced profits and also losses. Industrialists began to understand the importance of cooperation. Business organizations, mainly joint-stock companies began to associate together by forming combinations.
Meaning of Business combination
Business combination implies the coming together of firms, under common control. The objective was to pool their production, marketing, finance and profits. Combinations are formed both nationally as well as on global levels for any of the following reasons:
- Fixation of prices.
- Regulation of output.
- Eliminating competition.
- Creating entry barriers to prevent entry of new competitors.
- To establish monopolies.
- Undertake joint research and development.
- Utilization of resources.
Objectives of Business Combinations
The basic objective of combinations is the sustained profitable growth of the combining enterprises. This basic objective is realized by achieving economies of scale, reducing competition, preventing the entry of new firms and controlling the market.
The objectives of combinations are:
- Achieving sustained growth and profits.
- Reduction in competition.
- Preventing the entry of new firms by creating entry barriers.
- Achieving monopoly status.
- Undertaking large scale production and benefiting from economies of scale.
- Investing in common facilities and infrastructure.
- Avoiding cut-throat competition and the evils associated with it.
- Achieving greater financial strength and stability.
- Investing in research and development to innovate new products.
- Pooling of material and manpower to ensure efficiency in operations.
- Sharing knowledge of best practices for mutual benefit.
- Maintaining stability in prices.
- To withstand the effects of business cycles.